Encana reduces 2016 capital investment by 55 per cent, reports strong 2015

CALGARY, AB — According to a report from Calgary-based Encana, the corporation says they focused their 2015 capital investment on its core four assets, the Permian, Eagle Ford, Duvernay and Montney, which exceeded their combined fourth quarter production target.

For the fourth quarter of 2015, Encana reported cash flow of $383 million, or 45 cents per share, compared to fourth quarter 2014 cash flow of $377 million, or 51 cents per share. Operating earnings increased to $111 million, or 13 cents per share, up from $35 million, or 5 cents per share, in the fourth quarter of 2014.

Encana reported 2015 annual cash flow of $1.4 billion and a 2015 operating loss of $61 million. The company’s 2015 net loss of $5.2 billion is largely attributable to after-tax non-cash ceiling test impairments totalling $4.1 billion and a non-operating foreign exchange loss of about $700 million.

Encana says they achieved reserves replacement ratio of 233 per cent for the core four assets, and ‘captured’ over $400 million in capital and operating efficiency in 2015, exceeding target of $375 million. They reduced debt by almost 30 per cent, or $2 billion, with no long-term debt maturities until 2019, and saw ‘significant’ flexibility through the renewal of $4.5 billion of unsecured credit facilities that are fully committed and mature in 2020.

“Each year since the launch of our strategy, we have strengthened our balance sheet, increased our financial flexibility and lowered our cost structures. We enter 2016 with tremendous liquidity, a robust hedging program and a strong balance sheet which we will continue to prudently manage and protect,” said Doug Suttles, Encana President & CEO.

“The combination of our high quality portfolio, additional improvements in costs and capital efficiency and significant hedge position mean we have largely offset the impacts of a smaller capital program and lower oil and gas prices. Under our new plan, we will invest virtually all of our capital in our core four assets and our cost structure will be about $550 million lower than in 2015.”

The company has $4.5 billion of revolving credit facilities, which are unsecured, fully committed and do not mature until 2020. Since the launch of its strategy in late 2013, Encana has proactively reduced this ratio from 36 per cent in 2013, to 28 per cent as at December 31, 2015.

Looking to 2016, Encana’s revised capital plan will range between $900 million and $1 billion, reflecting a 55 per cent decrease from its full-year 2015 capital investment. The company estimates total volumes will average between 120,000 bbls/d and 130,000 bbls/d with natural gas production ranging from 1,300 MMcf/d to 1,400 MMcf/d.

Approximately 95 per cent of 2016 capital will be invested in the same aforementioned core four assets. The company will continue to optimize production from its base assets and minimize decline rates.

The company expects its cost structure in 2016 to be around $550 million lower than in 2015. Of that, between $200 million and $250 million are new and incremental savings from the company’s previous 2016 guidance. This includes reductions of $75 million to $125 million in transportation and processing costs, $50 million in operating costs, $25 million in production, mineral and other taxes, and $50 million in overhead costs.

Encana’s expected overhead cost savings include an approximate 20 per cent workforce reduction, bringing total workforce reduction since 2013 to over 50 per cent. More capital efficiency is expected to contribute a further cash flow of $50 million compared to previous 2016 guidance.

And, as at Feb. 19, 2016, Encana has gotten close to 75 per cent of expected 2016 oil, condensate and natural gas production.

This includes 54,000 barrels per day of March to December 2016 production hedged using WTI fixed price contracts at an average price of $56.33 per bbl. Encana also has approximately 15,000 bbls/d of March to December 2016 oil and condensate production hedged under three-way options.

The company has hedged approximately 75 per cent of March to December 2016 natural gas production. This includes 740 MMcf/d of March to December 2016 production hedged using NYMEX fixed price contracts at an average price of $2.76 per thousand cubic feet.

Encana has also executed 335 MMcf/d of 2016 NYMEX hedges as costless collars, which combine a purchased put and sold call with average strike prices of $2.22 per Mcf and $2.46 per Mcf, respectively. The company participates in price movements between the put and call levels, while achieving a firm price floor as protection against weak prices.